FLSA Tip Pooling Restrictions Do Not Extend to Employers Not Taking a Tip Credit: Fourth Circuit | Practical Law

FLSA Tip Pooling Restrictions Do Not Extend to Employers Not Taking a Tip Credit: Fourth Circuit | Practical Law

In Trejo v. Ryman Hospitality Properties, Inc., the US Court of Appeals for the Fourth Circuit joined the Ninth Circuit in holding that the tip credit provision of the Fair Labor Standards Act (FLSA), requiring  employers to permit tipped employees to keep all of their tips unless the employees are part of a valid tip pool, does not extend to employers that choose not to take a tip credit. The court also held that the FLSA does not create a private right of action for claims seeking only unpaid tips, not minimum wage or overtime pay, where the employer does not take a tip credit.

FLSA Tip Pooling Restrictions Do Not Extend to Employers Not Taking a Tip Credit: Fourth Circuit

by Practical Law Labor & Employment
Published on 03 Aug 2015 • USA (National/Federal)
In Trejo v. Ryman Hospitality Properties, Inc., the US Court of Appeals for the Fourth Circuit joined the Ninth Circuit in holding that the tip credit provision of the Fair Labor Standards Act (FLSA), requiring employers to permit tipped employees to keep all of their tips unless the employees are part of a valid tip pool, does not extend to employers that choose not to take a tip credit. The court also held that the FLSA does not create a private right of action for claims seeking only unpaid tips, not minimum wage or overtime pay, where the employer does not take a tip credit.
On July 29, 2015, in Trejo v. Ryman Hospitality Properties, Inc., the US Court of Appeals for the Fourth Circuit joined the Ninth Circuit in holding that the tip credit provision of the FLSA, requiring employers to allow tipped employees to keep all of their tips unless the employees are part of a valid tip pool, does not extend to employers that choose not to take a tip credit. The court's decision diverged from DOL regulations providing that tips must be retained by employees regardless of whether the employer takes a tip credit toward the employees' wages. The court also held that the FLSA does not create a private right of action for claims seeking only unpaid tips, not minimum wage or overtime pay, where the employer does not take a tip credit. The court affirmed a district court's dismissal of two employees' FLSA complaint premised solely on the FLSA's tip credit provision. (No. 14-cv-1485, (4th Cir. July 29, 2015).)

Background

Patricio Trejo, Mohammed Sazzad and Anthony Gomes worked as servers at a hotel and restaurant complex in Maryland. The employees were members of a union. Although the employees did not agree to a tip pooling arrangement, they each claimed that their employer took a portion of their daily tips and redistributed the tips to busboys, bartenders and other employees. After hearing from a union official that the tip-pooling arrangement was illegal, they sued their employer, alleging that it violated the FLSA's tip-pooling provision, Section 203(m), by not notifying them of the tip-pooling arrangement and not paying them all of their earned tips. They also claimed that their employer's tip practices violated their union's CBA and Maryland state law. The employees did not allege that they were denied overtime or that they were paid below minimum wage. (The employer did not take a tip credit and paid the employees a base salary above minimum wage.)
The district court granted the employer's motion to dismiss all claims, finding that:
  • The FLSA claims were meritless because the employees were paid minimum wage.
  • The Maryland state law claim was meritless because state law did not define tips as wages.
  • The plaintiffs had failed to exhaust their administrative remedies on the CBA violation claim.
Sazzad and Gomes appealed the dismissal of their FLSA claims. (Trejo did not file an appearance on appeal.)

Outcome

The Fourth Circuit affirmed the district court's dismissal of the plaintiffs' FLSA claims, holding that:
  • FLSA Section 203(m) does not extend to employers that choose not to take a tip credit.
  • The FLSA does not create a private right of action for claims seeking only unpaid tips, not minimum wage or overtime pay, where the employer does not take a tip credit.
The Fourth Circuit noted that:
  • The employees' claims raised a statutory construction question requiring the court to look to the plain meaning of the FLSA's tip credit provision in the context of the FLSA as a whole (see Santoro v. Accenture Fed. Servcs., LLC, 748 F.3d 217, 223 (4th Cir. 2014); King v. St. Vincent's Hosp., 502 U.S. 215, 221 (1991)).
  • The main purpose of the FLSA is to enforce employers' obligations to pay employees minimum wage and to limit their maximum working hours (Monahan v. County of Chesterfield, 95 F.3d 1263, 1266 (4th Cir. 1996)).
  • Section 203(m) of the FLSA:
    • permits employers in certain circumstances to take a tip credit against the minimum wage by applying employees' tips to their wages;
    • prohibits employers from taking a tip credit unless they provide employees with the required notice; and
    • requires employers to allow employees to keep all of their tips unless the employees are part of a valid tip pooling arrangement with other employees who regularly receive tips.
    (29 U.S.C. § 203(m).)
  • The plaintiffs argued that the employer's failure to inform them of the tip pooling arrangement rendered the arrangement invalid, and therefore the language of Section 203(m) permitting employees to retain all of their tips triggered a right to be compensated for the tips that were redistributed to other employees.
The Fourth Circuit analyzed Section 203(m) in the context of the entire FLSA, finding as the Ninth Circuit has, that Section 203(m):
  • Could only create a claim for the plaintiffs if the employer was using tips to satisfy its minimum wage obligations under the FLSA by taking a tip credit.
  • Does not create rights for all tipped employees, but instead creates rights and obligations for employers that take a tip credit (Cumbie v. Woody Woo, Inc., 596 F.3d 577, 580 (9th Cir. 2010)).
  • Does not apply to employees like the plaintiffs who are seeking lost tips separate from a minimum wage or overtime claim.
Judge Harris issued a concurring opinion, agreeing with the majority that the FLSA does not provide a private right of action for claims seeking lost tips separate from a minimum wage or overtime claim, but arguing that a substantive analysis of Section 203(m) was not necessary to reach that result. Judge Harris noted that:
  • The FLSA's two separate enforcement mechanisms (an express private right of action and public enforcement through the DOL) mean that certain FLSA provisions:
    • bind employers but do not subject them to a private lawsuit; and
    • provide employees with substantive protections and rights that may not be enforceable through a private right of action.
  • Alleged violations of Section 203(m) are not redressable in a private FLSA lawsuit. Only Section 216(b) of the FLSA provides an express private right of action, and plaintiffs concede their claims do not fall within that section (29 U.S.C. § 216(b)).
  • The extent to which Section 203(m) regulates employers' use of tips is being vigorously debated in federal courts, especially in light of a 2011 DOL regulation prohibiting employers from using an employee's tips for any reason besides as a credit against minimum wages or as part of a valid tip pooling arrangement, regardless of whether the employer takes a tip credit (29 C.F.R. § 531.52; see Oregon Rest. & Lodging v. Solis, 948 F. Supp. 2d 1217, 1223-24 (D. Or. June 7, 2013)).
  • The majority indicated that its opinion did not address the DOL regulation, but some of its analysis of Section 203(m) could be understood as addressing whether the regulation reasonably interprets that section, which is unnecessary in this case and premature since the issue was not briefed by both parties.

Practical Implications

The Fourth Circuit's decision in Trejo echoes the Ninth Circuit in Woody Woo, Inc., concluding that the FLSA's tip credit provision, Section 203(m), does not apply to employers that do not take a tip credit against employee wages. The DOL's 2011 regulation, providing that all tips earned by an employee belong to the employee regardless of whether the employer takes a tip credit, has not swayed these courts.
Employers in these circuits may be able to avoid Section 203(m) liability if they do not take a tip credit, particularly in the Fourth Circuit where the court held that the FLSA's Section 216(b) does not confer a private right of action for employees not seeking damages for unpaid minimum wages.
Employers that do take a tip credit should:
  • Allow employees to retain all of their tips, unless tips are redistributed as part of a valid tip pooling arrangement that includes other employees who customarily and regularly receive tips.
  • Provide the required tip credit notice to employees.
  • Ensure that an employee's tips plus their cash wages equal or exceed the minimum wage.